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Whats confusing me as I see the two questions contradicting each other? From my understanding is if Closing Inventory is Overstated = Profits Overstated??
Hi acca0923333,
Yes, if Closing Inventory is Overstated = Profits Overstated. I guess there is no problem to understand Question 1.Q2 It said understatement of the closing inventory at 31/12/20×1 = understatement of the opening inventory at 1/1/20×2. The understatement of opening inventory will cause profit to be increased for 20×2.
That’s what I thought about those questions.Q1
as you said “if Closing Inventory is Overstated = Gross Profits Overstated” >> in fact if Clsng Inventory is overstated we are counting less costs for that year.
(so we could tell “if Closing Inventory is understated = Gross Profits understated” )
Q2
Try to read the question in the opposite way. From the answer: if closing inventory is understated in 20X1 the Gross profit will be understated? (yes)
In the 20X2 opening inventory we wll have a certain amount of goods that are evaluated less than what they worth > the cost is understated > the Gross profit will be higher compared to the previous year ()
Always remember that cost of Sales is “OPN inventory+purchases – CLS inventory”
hope this helps
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hey plz can u send me this whol mock
for q,no.2
since closing inventory understated gross profit is understated in 20×1. gross profit to sales ratio is less than the correct value. in 20×2,this closing inventory becomes opening inventory are are sold at selling price. gross profit is overstated so gross profit to sale ratio is more than correct value.this 2 times effect explain the reason for the difference in percentage.
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